Rising interest rates threaten to hit household budgets harder than at any time since 1990 - when they were 18 per cent - as the Reserve Bank began an expected series of increases by lifting the official cash rate by 0.25 percentage points.

Yesterday's rise was the first in two years, but in that time home borrowings have exploded by 40 per cent to a record $333 billion in the climate of historically low interest rates.

This has left borrowers at the mercy of the central bank like never before - because the average home loan is so much bigger.

Economists estimate that the Reserve only has to lift official rates by about 1 per cent for repayments to eat into disposable incomes more than at any time during the past decade.

Soaring home prices, especially in Sydney and Melbourne, have been a major contributor to the debt splurge and the Reserve Bank governor, Ian Macfarlane, indicated that this was a factor in the rate rise. ");document.write("

advertisement

");
}
}
// -->

He called it an ''imbalance" in the economy and warned that the ''current overheating in the housing market" could jeopardise economic growth.

''The strong rises in house prices seen over recent years have also been associated with a rapid expansion in household debt, a process that carries longer-term risks if households become seriously over-extended."

National Australia Bank, the Commonwealth and Westpac will all pass on the 0.25 rise, lifting the standard variable rate to 6.32 per cent. Other lenders will follow.

Scott Haslem, an economist at the investment bank UBS Warburg, said rising household debt was much more sensitive to small interest rates rises than during the last increases in 1999-2000. ''Even a 0.25 per cent rate hike today means more to borrowers than it did even two years ago, according to our research."

If official rates rise to 5.5 per cent next year - as many economists predict - debt repayments will eat up 7.6 per cent of total disposable incomes, the largest proportion since the early 1990s.

When rates peaked at 7.5 per cent in late 1994, debt servicing took up 6.7 per cent of disposable income, while in late 2000, when rates were 6.25 per cent, repayments accounted for 7.1 per cent. In 1989, when official rates hit 18 per cent, mortgage repayments took up 8.8 per cent of total disposable income.

Home borrowing has trebled since the early 1990s and total debt, as a proportion of total income, has risen above 110 per cent. In the year to March, home borrowing grew at 18.4 per cent, the fastest pace since the mid-1990s. Credit card debt has also jumped to a record $20.5 billion, with an average of $2120 owed.

Consumer groups are concerned that many new borrowers, wooed by the Government's first home buyers' grant, are at great risk as rates rise.

''Many new home owners have used the home buyers' grant as a deposit, borrowed to their limit and taken on extra debts to buy furniture and do landscaping and so on," said Lisa Montgomery, of the consumer information service Infochoice. ''If rates continue to rise over the next 12 months that group will be hit hardest."

Non-bank lenders said they had not lent to this group because of the risks, Ms Montgomery said.